What is reasonable for a home based business to charge itself for rent?

sheldon_koggs asked:

I am 1 of the 2 partners in a home based business which currently is run out of my partner’s home. The business consumes space and also utilities. I am trying to come up with a fair rate for rent and a fair calculation for the use of utilities based on what is used for the business. Can someone suggest a guideline here?

I personally don’t feel that the company should be charge full fair market value for rent since I believe it’s a convenience to be able to work at home. Does anyone agree or am I way off here?

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4 Comments Add Yours ↓

  1. 1

    The IRS guidelines basically say add up the total square footage of the home and then the space for the business. Divide and you get a percentage. Multiple the total utilites and mortgage/rent by that percentage. The space has to be used only for business and some utilities are not deductable, primarily phone if memory serves because you would have it with or without the business.

  2. 2

    tidww is exactly right, I just wanted to reiterate that the offices space CANNOT be used for anything other than business.

  3. 3

    Both tid and Accent (above) have good answers. There are other considerations based on what kind on legal entity you are. For example, in a partnership the K-1 form could report an expense to you, but income to your partner above the actual expense of maintaining your work space. If you are a corporation, then the solution is a little more complicated, but feasible since your partner could charge the business rent OR have a payment incorporated into his salary for compensation for the anticipated expense. Ether way, it is recorded as a tax deductible expense (as it should be) for doing business in your partners home.

  4. 4

    Although it is completely legal to use a home based office as a tax write off, be aware that it is one of the HUGEST RED FLAGS in a home based business. The IRS has very specific guidelines that need to be followed and unless you plan to follow your deductions to the T… don’t do it. Look for other things that don’t send up red flags!

    Just word of advise given to me by our tax attorneys.

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